Now you see Murli Deora, now you don’t — what game are the Indians playing with Russian oil?

By John Helmer in Moscow

India’s Minister of Petroleum and Natural Gas, Murli Deora, was to have been in Moscow last week to urge approval of a controversial plan to put ₤1.4 billion into a London-listed company called Imperial Energy Corporation, whose oil deposits in the Tomsk region of Siberia are years from full production; whose current operations are loss-making; and whose oil, when it finally is lifted, will either be refined in Russia, or be exported by pipeline to China.

Satbir Singh, acting ambassador at the Indian Embassy in Moscow, was flummoxed when asked to explain whether or not Deora had been expected on October 23, the minister’s announced date of arrival. “We have no concrete information”, Satbir said through a spokesman, while the official spokesman of the Embassy, A.V.S. Rameshchandra, made himself incommunicado for the day. He left a message on his desk, advising callers that if they had a question about Deora, they should call Delhi.

There, it turned out, Deora’s subordinates were announcing that Deora would be in Moscow on November 4. They added that he isn’t making the trip to promote the Imperial Energy takeover by the state-owned offshore oil holding, ONGC Videsh. According to S. Sundareshan, a ministry official, Deora’s two-day trip next month will aim at securing the Russian government’s support for ONGC to buy stakes in other Russian oilfields and gas fields, though which ones Sundareshan didn’t say. R.S. Sharma, chairman of the Oil and Natural Gas Company (ONGC), the parent of ONGC Videsh, announced that “the Imperial transaction may not be on the agenda.”
It is eight weeks to the day, since Deora met President Dmitry Medvedev in Dushanbe, Tajikistan, during a summit meeting of Central Asian states. Then Deora seemed to know what assets he wanted. He told the press he had asked Medvedev to back ONGC Videsh’s bid for Imperial, and reported what he was told: “I am very happy with the meeting and confident that our Russian friends will help us overcome all situations in this deal.”

Deora didn’t explain what “situations” were standing in the way of closing the Imperial deal, which was first announced in August. Imperial employs the Pelham public relations company in London to be its spokesman, and according to Evgeny Chuikov of Pelham, nothing can be said by the company on the record, beyond the deal condirions already announced. These acknowledge that the new Control Commission on Foreign Investment, headed by Prime Minister Vladimir Putin, and the Federal Antimonopoly Service (FAS) should regulate the transaction, and approve it, according to the April 29 law on foreign takeovers of strategic assets.

The hint of help Deora mentioned from his Russian “friends” materialized in a wire service report last Friday. That indicated that the deal could go through without approval from the Control Commission, because the federal Ministry of Natural Resources (MNR) has now ruled that Imperial’s asset are not strategic. When counted one by one, they fall below the 70-million tonne threshold set out out in the law.

The problem with the press announcement, attributed to “a ministry official, who declined to be identified”, is that the ministry’s official spokesman, speaking for Yury Trutnev, the minister, told Asia Times Online that the ministry has reached no such conclusion at all — at least not yet.

Sources close to ONGC Videsh, and also Imperial, told Asia Times Online they know no more of Deora’s movements and negotiating agenda than what they have been reading in the press. But one source hinted there is a reason why ONGC Videsh has been bidding for Imperial that has not surfaced publicly before. That reason, he said, is that the Indians have already decided to bypass Russian government approval, and have intentionally chosen a deal for a non-strategic Russian oil asset. By picking oil deposits below the strategic threshold, the source suggests, ONGC Videsh can buy as a “100% owner”, without a Russian partner. The Indian company would not have made its bid at all, the source added, if the oil and gas resources were so large as to be classed as strategic under Russian law, and require a Russian partner, as well as the permission of the Russian government to proceed.

Why then would the Indian government, and its ONGC Videsh arm, want to pay ₤1.4 billion for peanuts?

At the time the offer was made, the sterling share price offer was equivalent to $2.6 billion. Today the collapse of sterling has lowered it to $2.2 billion. Still, the offer represented a 62% premium on the share price of Imperial just before first word of the acquisition was disclosed to the London Stock Exchange.

Why would the Indian government and its state oil company concede that even buying peanuts in Russia’s oil sector requires the Petroleum Minister to speak to two Russian presidents about it — Putin in January of 2008, Medvedev in August– plan an October visit to Moscow to negotiate, then postpone that to November? According to Indian critics of Deora’s policy and ONGC’s spending plans, the reason for proposing to spend billions of dollars on peanuts is unprintable.

Imperial lists as assets 17 oilfields in the Tomsk region of southeastern Siberia; it has employed the US consulting company, Golyer and MacNaughton to estimate the reserves. Reserve data are difficult to assess, for they depend on the classification systems used, North American and Russian; and because the international reserve estimates have been challenged by Russia’s licensing authority, Rospriradnadzor. The Russian law defining what is strategic According to data provided by Imperial, proven and probable reserves (classified P1, P2 in the US, C1 and C2 in Russia) total 118 million tonnes. The largest of the fields is reported to contain 19 million tonnes, far below the strategic threshold.
Imperial also reports possible reserves (P3), and with them, counts a grand total of 451 milion tonnes. With this counting methodology, two of the fields would rise just above the strategic threshold.

Analysts report that the company’s exploration activities improve the prospects that these additional numbers may be added to the state registered reserves total. The reserve figures tripled between 2004 and 2006, and grew by another 15% last year. For the time being, however, Imperial has told Asia Times Online, the only numbers officially allowed for reserve counting put all of Imperial’s fields under the strategic limit.

Last year, Oleg Mitvol headed the inspection effort of Rospriradnadzor, the licence compliance branch of MNR; at the time he challenged both Golyer and MacNaughton’s reserve counts, and also Imperial’s licences. This week, he told Asia Times Online, he remains skeptical of Imperial’s reserve counts, but is convinced that whatever number lies underground, “I don’t think this company’s [assets] are strategic.”

Current output by Imperial is about 25,000 barrels per day (3,400 tonnes), with a target of 35,000 bd in a year’s time. The unaudited result for the first half of this year is a loss of $19 million.

If the reserves are too small to warrant the strategic label, are they too small to earn the ₤1.4 billion the Indians are offering? Imperial claims that the collapse in the current world price for oil ought not to make a difference to the long-term value of Imperial’s oilfield assets. A report in August by Renaissance Capital –a Moscow brokerage which says it was a market maker for Imperial shares — concludes that “compared with other independent oil and gas companies operating in Russia, IEC [Imperial] is one of the cheapest based on the reserves multiples.” Dividing the enterprise value of the company (market capitalization less debt) into the probable reserve total, the report estimates a price of $2.1 per barrel of oil equivalent. Adding the possible reserves reduces the per barrel price to $1.2. This compares to significantly higher values for two other Russian junior oil producers, Sibir Energy and West Siberian Resources. Both of those produce significantly more oil and cash than Imperial.

Staff sources at the Control Commission in Moscow have acknowledged they are studying whether ONGC’s takeover of Imperial warrants commission approval. The Federal Antimonopoly Service (FAS) told Asia Times Online that the approval process is under way. FAS spokesman Sergei Noskovich said that ONGC had filed an application: “We are reviewing the application for the deal involving Imperial Energy. In order to properly review this application, we need an MNR [Ministry of Natural Resources] ruling on whether Imperial Energy is a strategic company, holding strategic deposits, because in the event that it is, then the deal should be approved by the commission headed by the prime minister.”

Sources close to ONGC claim that if the deal goes through on the ground that it is too small for the Russian government to be concerned, the Indians have already been talking to two other major Russian oil producers, also in the Tomsk region, about future plans for cooperation. Gazpromneft — the former Sibneft company which Gazprom bought from Roman Abramovich in 2004 — attempted to buy Imperial a year ago, but its price was rejected by Imperial as too low at the time. ONGC Videsh was asked if the reason its offer for Imperial is so high is that it plans to recoup part of the price, by reselling a share in Imperial to Rosneft or Gaszpromneft? Officially, there is no comment. However, unofficially, sources close to the Indian company acknowledge there have already been “conversations” with both Russian companies. After the deal, the sources intimate, the Indians are reserving their options.

Something similar has happened before. In August 2006, the Chinese oil major China Petroleum and Chemical Company (Sinopec) bought the Udmurtneft oilfields from TNK-BP at a premium price, only to transfer a 51% stake to Rosneft shortly afterwards. When it came to deal-making with the Russians, the Chinese had shown in that transaction how they could out-manoeuvre the Indians. Sinopec was reportedly a bidder for Imperial until the price ONGC proposed paying grew too high.

There are political problems in Moscow the Indians are less ready to acknowledge. Gazpromneft is under the wing of Medvedev, who was Gazprom’s chairman until he moved to the Kremlin in May. Rosneft is chaired by Deputy Prime Minister Igor Sechin, a close confidante of Putin, and a figure who is famously jealous of his prerogatives in deciding who gets Russia’s oil concessions.

There may also be financing problems for ONGC, which has said it will raise a bridge loan to finance the acquisition of Imperial. The crash in stock values since July and August, when the transaction was negotiated, has cut Imperial’s share price to 876 pence today, equivalent to ₤894 million ($1.4 billion). That is a drop of 36%. Bank lenders may be reluctant to accept Imperial shares as collateral for the loan. And if the loan terms require the surrender of all Imperial shares as bank collateral, the Control Commission may be concerned that, non-strategic though they may be one by one, altogether they add up to an asset the Kremlin does not want to risk forfeiting to a foreign bank syndicate.

The pressure on Deora to bet Indian cash on something larger than Imperial is thus casting a shadow over whether the government in Delhi continues to endorse the Imperial takeover. India’s priorities in Russia, Deora’s ministry has been suggesting this week, are much bigger, and therefore “strategic”. ONGC is already a 20% stakeholder in the large Sakhalin-1 project in the Russian fareast; other shareholders include ExxonMobil with 30%; a Japanese consortium with 30%; and two Russian stakeholders with a combined 19%. India is drawing dividends from the project, but no oil, most of which is despatched by tanker from DeKastri port to Jaqpan, South Korea, and China.

According to briefings Deora’s subordinates have given the Indian press this month, ONGC is looking at participating in the development of Sakhalin-3, another huge oil and gas deposit off Sakhalin island. Just one of the blocs in this exploration area, Veninsky, is estimated to contain 169.4 million tonnes of oil, and 258 billion cubic metres of natural gas. Three other blocs in the same project area are estimated to contain more than 600 million tonnes of oil, 770 billion cubic metres of gas.

For the time being, Veninsky is considered an exploration project of Rosneft, with China’s Sinopec holding a 25% stake. Licences for the entire field were originally awarded in 1993, when ExxonMobil won. The US major had also won the development rights to Sakhalin-1 nearby. The Russian government has allowed the second project to proceed into production, but barred ExxonMobil from gaining production rights at Sakhalin-3. There has also been a high-level dispute over whether Rosneft’s grip on Veninsky should be cancelled, and the production rights put up for auction.

If the Indians want to march into a new auction, and oblige the Chinese to step aside, they are dreaming. Rosneft spokesman Nikolai Manelov told Asia Times Online: “The current status [of Veninsky] is exploration. We are going to value the reserves there very soon. I am not authorized to comment on what is going to happen next. I am also not commenting on other companies, so I can’t answer your question regarding ONGC.” Whether Rosneft intends to be ONGC’s silent partner, or simply silent, will become clear in a few days’ time. The outcome will speak volumes about the effectiveness of India’s oilmen in competition with the Chinese.